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Directors’ Liability: A Key Concern for Financial Services Firms
In the wake of recent regulatory developments, directors of financial services firms are facing increasing scrutiny over their liability in the event of company insolvency or breach of duty. The Companies Act and other relevant legislation impose strict obligations on directors to ensure the sound management of a company.
Liability Under the Companies Act
Directors may be held personally liable for breaches of general duties, such as acting in the best interests of the company, and specific duties, like failure to make statutory filings. In addition, companies and third parties can sue directors individually for damages caused by their breach of duty or negligence.
Liability Under Specific Legislation
Various administrative duties are imposed on directors by laws other than the Companies Act. For instance:
- Chapter 371 of the Laws of Malta imposes personal liability on individuals who knowingly participate in certain offences.
- Criminal liability may also arise where a director violates specific provisions of the law, or is held vicariously liable for an offence committed by the company.
Liability in Insolvency or Winding-Up
Directors may incur liability in cases of:
- Wrongful trading, where they allow an insolvent company to continue operating without reasonable prospect of avoiding dissolution.
- Fraudulent trading, which may also result in personal liability.
Private Rights of Action
While the Maltese Financial Services Authority (MFSA) does not deal with consumer complaints, regulated financial services providers must have a procedure for resolving disputes with customers. Consumers can:
- Lodge a complaint with the provider
- Appeal to the MFSA
- Take the matter to court
Standard of Care for Customers
Regulated persons have a duty to act in the best interests of their clients, acting honestly and fairly with utmost good faith, integrity, due skill, and care. The Conduct of Business Rulebook published by the MFSA requires retail clients to be given a higher degree of care and protection.
Differing Standard of Care
The standard of care may differ based on customer sophistication. Certain financial services firms are required to classify their clients as “retail” or “professional”, offering more protection to investors with less investment knowledge and experience, while those with more expertise receive lesser protection.
Rule-Making Process
Legislative acts in Malta undergo a parliamentary process comprising three readings, while rules issued by the MFSA do not appear to follow a formal consultation procedure. However, the MFSA typically consults on laws or rule changes that will significantly affect the financial services industry through publications like White Papers.